Matthew Ferrara, Philosopher

REALTORS Beware: H.R. 5028 Could Collapse the Housing Market

If you’re looking for how the housing market double-dip will be created, here’s the answer. Never mind the endless taxpayer-backed money-pits of FHA, Fannie and Freddie: Here comes a proposal to grant defaulting homeowners the “right” to rent their homes for five years.

It’s called H.R. 5028 and it’s no joke. The “Right to Rent” bill drafted before Congress meets with the approval of the Center of Economic Policy and Research, a think-tank that believes home “ownership may not be the smartest option.” Not that such thinking in Washington should come as news to our readers, since we’ve reported that none other than FHA’s Director Donovan has made similar statements in recent months.

But now we’re talking potential legislation.

According to HousingWire, the bill would grant the right to homeowners entering foreclosure to occupy their homes for up to five years, making fair-market rent payments, determined by an independent appraiser, to the lender. The CEPR says this would give homeowners important “security” since they would not be “thrown out on the streets.” CEPR cites the cost savings to “homeowners” who would be able to rent their homes rather than face evictions and have to rent on the open market.

REALTORS should be horrified.

If you wanted to prolong the housing recovery, undermine lender confidence, delay eventual foreclosures and fundamentally rewrite the basic contract laws of mortgage lending in the country, then perhaps no measure could do more harm than H.R. 5028. If enacted, it will not only cause a double dip. It will freeze credit, scare away investors and move us far beyond a “double dip” right into a full blown economic depression.

There are many reasons this bill should be opposed by real estate professionals, lenders and home owners. Just in case the National Association of REALTORS needs a few bullet points for its policy opposition statement, we’ll offer them here:

  1. Granting the right to “occupy” a home to former borrowers who have defaulted on their mortgage abrogates the property rights of the lien holder. Essentially, you will have nationalized housing and transferred ownership from the legal title holders to squatters. It doesn’t matter that they will be paying rent. The basic right to control and dispose of the property by the legal owner will be violated. While the mortgage holder could still sell the property, the future buyer would have to agree to purchase with tenants included. Property ownership will cease to have real meaning in the eyes of the law.
  2. On multiple levels, home owners will be transformed without their consent. This will fundamentally rewrite their capital positions overnight, alter their net worth and skew their tax positions. Rather than having an option to sell at a loss, or leave the property empty (they may not wish to be landlords), property owners will suddenly become contractually obligated “brother’s keeper” for thousands of other people in society. According to the bill, the “tenants” could not be evicted by the property owner as long as they keep paying their rent. Furthermore, the rental amount will be set by a third party (an appraiser) not by the property owner. Haven’t we seen this rent-control scheme before?  Consider both the owner’s property rights – and his personal liberty – temporarily revoked.
  3. Further attempts by to delay or repeal the fundamental economic laws of supply and demand merely put off the day of reckoning. The bill’s proponents engage in wishful thinking that it makes more sense to rent properties rather than sell at a loss and clear them from the lenders’ balance sheets through the normal foreclosure process. Their only hope is that the market “might” be better five years from now, when they (presumably) could evict the renters and sell the property for a higher price than they might today. They forget the expenses (and losses) that could be incurred during that time, including costs of making a home rental-law compliant, maintenance and management services. And they are conveniently forgetting about inflation: Selling a home five years from now with future dollars worth less than today is not a formula for increasing economic prosperity. Note that the price of gold flirted with $1300 an ounce today.
  4. Just recently in June, the CEPR appeared to be lecturing Fannie Mae on the wisdom of punishing strategic defaulters. Thus, they are entirely consistent in their support for a “right to rent” bill, since it would not only reward strategic defaulters, but encourage them. Granting non-owners (i.e. former mortgage payers) the right to occupy a property for a period of time (a right not granted to ordinary renters in the same marketplace) removes the moral public sanction of strategic defaults. It also eliminates the ordinary pain that defaulters incur – the costs involved in moving – that are key market pricing mechanisms that keep many from simply walking away.
  5. The real estate industry would suffer immeasurable further losses of sales and income overnight. While few real estate brokers are getting rich servicing short sales these days, the process at least creates a minimal cash flow to the commission-income based industry. Instantly transferring millions of homes off the market – by turning them into rental properties – will eliminate a vast source of potential sales over the next five years. Nearly one million real estate professionals would suddenly find fewer transaction opportunities in their local markets. Furthermore, the sudden and rapid elimination of lower priced (distressed) properties for sale would cause an immediate jump in home prices for remaining privately-0wned properties for sale. While initially REALTORS might think this beneficial, they would soon realize that increased property prices mean decreased home affordability for buyers who will continue to face stringent lending standards, lower income and rising unemployment. The brokerage business would blip up for a few months, then collapse as millions of homes that might have been sold once or even twice in the next five years were suddenly locked up in government-granted rental contracts.

We could go on, but the point is likely clear. Any plan that begins by abrogating the rights of mortgage holders to receive their assets back when borrowers cannot make their payments and dispose of it as they see fit is, by any other name, nationalization of the housing market. Banks’ response would be instant and simple: All mortgage lending would stop. If cars can be repossessed but houses cannot, banks will not lend large sums on in “unsecured” lending conditions. Any attempt to argue the measures would be merely temporary – only five years – is disingenuous: Such consumer “rights” are rarely repealed by government once the public sinks its teeth into a free lunch.

Ultimately, H.R. 5028 isn’t about the right of people not to be thrown out into the streets. It’s about transferring the rights of one group – property owners – to others – mortgage defaulters. For an industry built around a single fundamental idea – the right to own your own home – REALTORS should be deeply concerned that an idea like this could even make it to the drafting stage in Congress.

Then again, we’ve seen other industries nationalized in the last two years in America – cars, health care, student loans. What’s to say the government’s solution to the housing market will be any different?

  • Tmbooggs28

    yes realtors should be horrified – whatever- with 12.5 months worth of inventory out there now I’d say that realtors have houses to pander to others – second, if the mortgage industry hadn’t just decided to lend to anyone and banks did bundle and sell these loans as soon as they were created then perhaps this problem wouldn’t have begun anyway – but shoot, lets just keep blaming the mortgage holder shall we cause it’s the same song just in a different tune….

  • Mary Jane McDaniel

    This would definitely add to the problems that we are already facing! We need to let our elected officials know that we don’t want this!

  • Rberner

    My initial (gut) reaction to your critique of this bill is…when did you become a shill of the banking industry? It’s the banking, credit, and mortgage industry that got us into this mess. It’s only right, that after gladly accepting their TARP bailout, they should take a hit in this market just like everyone else. I think this bill is designed to save homeowners from foreclosure, drop the inventory which will restore prices and help us out of the hole. Nationalization of the housing industry? Say what you really mean and drop in a few “socialist” charges as well. You’ve been watching too much Fox New…er…Entertainment.

  • Lance Martin


    Well said. Just another nightmare bill that will cause more damage to our “market”. Leave it alone (the market) and we will work our way out. I will be at the CAR meetings in two weeks. I will scream my opposition for the roof tops!

    Lance Martin

  • Sorry… maybe I was accidentally thinking of the rights of contract holders… or the rights of property owners… or the fact that not all banks were part of the crisis… or took TARP funds… or that they paid them back with interest…. must have mistakenly forgotten that all banks are just evil… thanks for reminding me… :>

  • Lance… this bill truly terrifies me. It will decimate the real estate industry. Do you know of any good government jobs we could apply for?

  • Allyson

    The sooner the government stops meddling and creating artificial supply/demand ratios, the better off we’ll all be when the market can again do what it is naturally supposed to do! Thanks, Matthew. Great article.

  • Matt — great catch on this. For further horror, check out PETRA and its provisions about “regional tenant associations” that may be funded with taxpayer dollars. Also would be worth looking at the comments from the Conference on the Future of Housing Finance.

  • Glad someone else is writing about this. My blog about Right to Rent was entitled You Have the Right to Be Stupid!

    Yes foreclosures suck, families losing their homes sucks and last but not least, the banks suck. But this proposal sucks even more. Sorry for the course language but I don’t know how to sugar coat this. Get people working, stabilize and improve the economy. Get the banks to work with distressed home owners. Focus on the social and economic benefits to America from stable communities via sustainable home ownership.

  • Sharon

    People are confused enough much less to put this on the table. Clients that I am helping get on with their lives will survive this and so will we unless the unintentional fall out of this bill were to happen. While there is plenty of blame to go around, there is personal responsiblilty on the part of the individual too.

  • Thanks, Rob: I’ve been watching PETRA and Donovan at HUD and all of the other housing-undermining-forces for a while… it’s very scary.

  • I saw your blog posting – it was great! We can all agree that forecslosures suck and it’s tough; but sometimes, that’s life. And nobody is going to “die” because they lose their home; they will rent; their families will step in; we have plenty of safety nets. Let’s move ON! Thanks for your comments!

  • Sharon: Right – we have to help everyone move ON and stop blaming some/others. Let’s just get what has to be done DONE and we’ll all move forward together.

  • Dbjotvedt

    I enjoyed the article and I enjoyed the comments (Lance and Matthew, there are government jobs in Iran and Afghanistan if you are interested). Seriously though, as an investor and a professional working in one of the hardest hit markets (Arizona); I am not that concerned with this bill. I see its merits and I see its application. I also work in a state where the laws favor the landlord, not the tenant…so maybe only I can see the merits and application. Investors will know about a tenant and that will factor into purchase consideration, it will harden the stabilization of falling sales prices (and rental rates will hold), it will keep homes from falling into disrepair, and it will help with the looming housing shortage I see being reported in the near future. As far as my view goes, this bill will help the home owners who haven’t defaulted the most.

  • I can tell you in Maryland, the land of redemption (we have an additonal 90 day wait time after foreclosure that most states don’t have) the last thing we need is to extend the process. I have 325 foreclosure properties now and only 50 of them are in MLS. The rest are in PREMARKETING status ….just part of the delay………

  • Standinginson

    WoW, Does this mean I should upgrade to a beach or mtn house before this passes? Huh!

  • Fairness is one thing, but there is way too much government intrusion in private contracts. If the contracts are illegal, yes people should have a right to go to government (the courts) to get relief. But I looked at the list of legislators sponsoring H.R. 5028. I don’t know much about many of them, but the few that I have some familiarity with their economic views make me not surprised. Some of these people are the same ones who wanted investigations because the lenders were not lending as much, nor to many people that the legislators wanted taken care of.

    Five year rentals-why not ten years or even twenty. Then when somebody stops paying rent, and there is not enough cash flow to pay the upkeep and taxes, the local government can take the property.

  • Lloyd

    I just ran across HR 5028 and this argument against it. I have worked with homeless people for 16 years and know that the mess that the banks and mortgage lenders have created is causing severe hardship, unemployment and homelessness for many who never dreamed they’d be in the position they are in. The market got us into this mess and, Mr. Ferrara, your solution seems to be, “Let the market get us out of it, because if we don’t the realtors and banks will suffer.” This has been a major market failure and I’d like to see or hear a more creative solution than, “Let the market take care of it.” That does not offer much comfort to the millions suffering foreclosure, and I heard recently that we are only one-third of the way through the foreclosure crisis, i.e. that two-thirds of the foreclosures will take place in the next few years.

  • Lloyd:
    Thanks for your comments, but I can’t really agree. The banks lent money, under pressure to lower their standards by their REGULATOR – the government. The “free market” didn’t cause this mess; Government INTERFERENCE with the market did. It was decades of “affordable housing” advocates for people who should NEVER have been buying a home at their income levels that was supported by FHA/Fan/Fred loose-lending standards. Blaming the banks for lending is like blaming the beer brewer for people drinking…. puhhh lease!